Does Nippon Electric Glass (TSE:5214) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Nippon Electric Glass Co., Ltd. (TSE:5214) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Nippon Electric Glass

What Is Nippon Electric Glass's Net Debt?

As you can see below, Nippon Electric Glass had JP¥115.8b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have JP¥119.6b in cash offsetting this, leading to net cash of JP¥3.80b.

How Strong Is Nippon Electric Glass' Balance Sheet?

We can see from the most recent balance sheet that Nippon Electric Glass had liabilities of JP¥129.8b falling due within a year, and liabilities of JP¥86.8b due beyond that. Offsetting this, it had JP¥119.6b in cash and JP¥67.8b in receivables that were due within 12 months. So its liabilities total JP¥29.3b more than the combination of its cash and short-term receivables.

Since publicly traded Nippon Electric Glass shares are worth a total of JP¥277.7b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Nippon Electric Glass boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Nippon Electric Glass can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Nippon Electric Glass saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Nippon Electric Glass?

While Nippon Electric Glass lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of JP¥20b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Nippon Electric Glass (of which 1 can't be ignored!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.